Tax: US targets intra-company loans

Tuesday, April 12, 2016

Escalating a 19-month regulatory assault against US companies’ shifting their tax addresses offshore, President Barack Obama’s administration last week also went after companies that have always been overseas.

A proposed regulation from the Treasury Department targets loans that foreign companies make to their US subsidiaries — a technique that loads the American units with tax-deductible interest payments while shifting their profits offshore.

The rule is aimed at so-called earnings stripping -- which US Treasury officials call a key strategy employed by US companies that have completed “inversions,” the transfer of their tax addresses to lower-tax countries.

But it would also apply to any bona fide foreign firm that has a US subsidiary, ranging from manufacturers and distributors to private-equity firms and hedge funds, according to tax lawyers and academics.

The provision “is absolutely breathtaking, very elaborate and very far-reaching,” said H. David Rosenbloom, an international tax lawyer at Caplin & Drysdale in Washington, and a former senior Treasury Department tax official.

“This regulation uses inversions as an excuse to do something way beyond inversions,” he said.

The proposed rule “could have a profound impact on a range of modern treasury management techniques,” Big Four accounting firm PwC wrote in a research note last week.

Treasury officials say the proposal is designed to catch intra-company loans that don’t result in net new investments in the US

The lending provision was overshadowed in the days following Treasury’s April 4 announcement by the cancellation of a $160 billion (€140.3bn) merger between Pfizer and Allergan.

That deal, which would have created a new company with a tax address here, ended over another new rule that would limit companies’ ability to participate in inversion transactions if they’ve already done them within the past 36 months. Allergan has been involved in repeated mergers in that time frame.

Together, the April 4 measures are the toughest in a series of administration proposals aimed at inversions, which have captured attention in the 2016 presidential race and prompted Democratic and Republican candidates to vow to end the practice.

Since the first inversion in 1982, 53 companies have completed them -- 22 of them since 2012.

The Treasury’s latest proposal will cut a much broader swath than previous rules.

The new rule goes much further, said Bret Wells, an associate law professor at the University of Houston Law Center who studies inversions.